Revenue models: Pay-per-use

 

The pay-per-use model (as well as the pay-per-view model) occurs most commonly in the consumer media market, and usually involves cases where the transaction values are small and can be automated. The model is also used in the supply of discrete online communications and education services such as web conferencing, virtual training and internet fax services.

Customer relationships: Media companies implementing the pay-per-use model tend to already enjoy a billing relationship with their customers. In these cases, companies use pay-per-view offerings to increase revenue per customer. Web-based services such as communications or education often use the pay-per-use model to encourage potential customers to try the service with the goal of building a long-term client relationship.

Marketing issues related to the pay-per-use model: For media offerings, the pay-per-use model relies on heavy advertising to generate interest in premium content such as live sporting events or recently released movies. For online services, particularly communications, the company will expand its user base virally as awareness spreads from early customers to those they communicate with through the offering.

Operational implications: In the small-transaction, pay-per-view media context, operations must be structured to distribute high-quality content and process transactions automatically on a large scale. For pay-per-use online services, transactions and service delivery must be similarly automatic.

Financial and strategic implications: Companies planning to roll out a pay-per-use offering need the capital necessary to build an efficient mechanism to deliver the media or services. For media offerings, it is also necessary to acquire the rights to suitable high-quality content, and to market it effectively through existing channels.

Key metrics: Companies with pay-per-use media offerings should focus on the cost of customer acquisition as well as gross margins (which incorporates the cost of content acquisition). Companies offering pay-per-use online services need to focus on converting pay-per-use customers into subscribers.

Modalities: Companies often use pay-per-use in conjunction with other revenue models such as software-as-a-service (SaaS) subscriptions. In a media setting, pay-per-use can also be combined with advertising revenues.

Costs and benefits of the pay-per-use model : When competing with companies employing other revenue models, pay-per-use can help secure market share and reduce adoption barriers, particularly when used in combination with the SaaS model. However, for start-ups, the pay-per-use model is highly dependent on high transaction volumes. This makes it a less appropriate model for early-stage companies.

Tags: business-models, pricing